When money is scarce and household finances are stretched to the breaking point, a payday loan can be only a promise and a signature away. The promise – to repay the loan within two weeks – sometimes cannot be kept, and another payday loan to repay that one may soon be in the works. Weeks become months and the annual interest rate on these loans can be as high as 400 percent. The budget, if there was one, flies out the window.
This story is one of a series of stories on "fringe banking," using non-traditional forms of financial services, such as payday loans and currency exchanges. Because their interest rates are exorbitant and because their clients are often society’s most vulnerable members, such institutions are termed predatory lenders. Most of these financial predators disguise their own gain in terms of consumer benefit.
Two organizations in Evanston – Connections and the YWCA Evanston/North Shore – offer classes in financial literacy for their clients. In a broad sense, those who attend these classes start on their journey to financial independence from two very different points: Clients of Connections may be said to start at zero, because, says Executive Director Paul Selden, very few of them have ever had money, much less, credit, to manage. "Most [Connections clients] haven’t had credit. They have managed just to survive on family and friends and picking up jobs under the table," said Mr. Selden. "Some [few] were maxed out on credit cards and some were in trouble with payday loans. [But there’s] – not a lot you can do with a 400-percent interest rate."
Many clients of the YWCA Evanston/North Shore begin their path to financial autonomy behind even the start line. "Many women lack basic financial tools. They are ‘unbanked’ – using non-traditional sources of banking," says Executive Director Karen Singer. "They have had terrible credit issues, which situations their husbands had often put them in. They have no ability to get out and live independently, no way to get an apartment, no way to go back to school."
Patricia Hunter, economic empowerment manager, offers the six-hour course in financial literacy at the YWCA. She teaches clients how to understand and evaluate the causes and effects of their decisions about money. "[Helping women develop the] ability to make a wise financial choice is very critical," says Ms. Hunter. "Many are alone, have had negative experiences with banks. [The course is about how to] help economically vulnerable women make wise economic choices. … We give them options rather than telling them what to do."
The fringe banking industry, says Ms. Hunter, is "a $45 billion-a-year industry. … [Economically vulnerable women] are targeted by these predators. ... It becomes up to the women to [understand the consequences]." As an example, she said, many check-cashing stores "talk only about the upside.
"What we’re trying to do is to get these women to understand the downside. When they apply for a payday loan, the [loan personnel] tell them the upside. [We tell them to] ‘be aware of what you’re signing. If they’re not willing to talk with you like you’re a 3-year-old and put [the information] out there – if they’re not willing to talk with you and spell it out, you probably don’t want to do business with them.’"
"If you can’t read the [small] print, you’re in trouble," adds Ms. Singer.
Budgeting, says Ms. Singer, "requires a lot of discipline." It is a major part of the Connections and the YWCA’s classes. "Budgeting is the cornerstone of what we do," says Ms. Hunter. "Budgeting is a tool that will allow you to reduce your debt and achieve your financial goals." She provides clients with an Excel spreadsheet "so they can look at what’s coming in and what’s going out."
Mr. Selden says at Connections, "everyone who goes into housing [is offered a course] which covers taxes, credit, health-care and budgeting. "Most of it is around planning a budget," he said. "Budgeting is somewhat valuable because they’ve never done it – a lot of work goes into budgeting."
The budget classes "begin with where they are," says Mr. Selden, and they talk about where they would like to be. We help them "get from the first to the second: job training or applying for benefits – try to get them in the driver’s seat."
Mr. Selden says he thinks that "financial literacy is helpful even if people haven’t been there [in a place to have money to manage] before. You need to begin somewhere." Still, he adds, "in some ways the classroom model doesn’t work for those who have had no experience [in the workplace or with managing money]. You need to be able to learn these things when you are experiencing them. Learning about EITC [earned income tax credit] is great but [a greater learning experience] is if you can build on frustration."
Breaking into the embarrassment about financial decisions is key to establishing camaraderie and trust, says Ms. Hunter. "People are a lot more comfortable talking about their sex life than they are about money." Still, she says, "Money is … a universal issue – it cuts across socioeconomic and ethnic levels. Women feel more comfortable exchanging stories …"
Banking on the Future
"We’re thinking about how to expand this information to women throughout their life-cycle – high school, college, first job – because that’s where they’re really starting the practices of managing their own money," says Ms. Singer.
Ms. Hunter says, "These women really want to learn. … People want to buy a house, start a business. Women in this community want to make the right choices."
Ms. Hunter says she encourages her clients to save. "I tell them, ‘It’s not how much you save; it’s that you save every month – that will open the door [to financial independence],’" she says. Maintaining a good credit rating is also important. "Everyone should pull her credit report annually," says Ms. Hunter. "Women who are economically vulnerable are afraid of looking at their credit report. … One assignment in our class is to pull a credit report. The women find it very empowering."
Ms. Hunter says she feels there is a "predatory environment" at present, so she advises clients about where to go for help with loans, credit repair and other financial products and services. They should beware, she says, not only of payday loans but of credit-repair services, check cashing services and pre-loaded [debit] cards.
Because companies offering these services emphasize the upside and minimize the downside, Ms. Hunter says she tells her clients, "If something sounds too good to be true, it’s not true."